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HMRC internal manual

Company Taxation Manual

Particular topics: companies in partnership: investment partnerships

There cannot be a partnership without a ‘business’. Most partnerships carry on a trade or profession. But it is possible for an activity not to amount to a trade or profession and still be within the definition of ‘business’ in the Partnership Act 1890. Property and investment management, carried on as a commercial venture, may fall into this narrow category. Such partnerships are sometimes known as ‘investment partnerships’. The rules set out at CTM36510 should be used to calculate the tax liability of company members of an investment partnership. For further guidance on what constitutes a ‘business’ in the field of property investment see PIM1030.

Limited partnerships have become more common since 1987, when the British Venture Capital Association (BVCA) published guidelines on how they might be used as investment funds. They are almost always company partnerships. The relevant parts of the BVCA guidelines are reproduced below at CTM36580. More detailed notes on the taxation of these investment partnerships may be obtained from CTIS (Technical).

The business of these partnerships is the making and managing of investments.  Although they are partnerships and the taxation rules apply on that basis, the limited partners probably regard the scheme as a form of unit trust or other investment fund.  They put up capital for investment in a number of unquoted companies on their behalf.  They expect to pay to have the fund managed, so they let the general partner take a share of the income and gains in excess of their or its contribution of capital.

If this were an ordinary investment fund, and not a partnership, the general partner would be the fund manager and its share of the partnership profits would be the annual percentage management fee.  A feature of these partnerships is that in years when the profits are too low to meet the general partner’s guaranteed profit share, the general partner will probably take an interest free loan from the capital accounts of the other partners.  Such a loan is not regarded as taxable income in the hands of the general partner.  The loan will be repaid out of its share of future partnership profits and the general partner will be taxed on it at that stage.